@eewiz: good points! What I stated above assumed that Intel will keep its margins and market share in other higher margin products while sustaining a loss-leading lower margin business against ARM. But that is not assured and can result in irrecoverable damage. And to make matters worse, the margins seem to be eroding all across the board these days so this is a tough quandary for Intel.
I see merit in what @Bert22306 says below -Intel should find other higher margin products including IP. After all, Intel is known for its strong engineering team. Together with that and its fab services, this could result in a sustainable business model.
MP Divakar

theoretically you are right.. but I doubt how practical the idea is..
Till now Intel isnt successful in coming up with a CPU that has similar performance at similar power range that of a ARM CPU. But lets assume for the time being , that they are able to do this. Even then focusing mainly on these devices, will kill their margins for a long time and Intel stock will take the beating. Its market cap will dip to 10-20% of its current value.
CEOs are paid based on the performance of the company on a short term basis.. at best if in long term it will be 1-5 years. But such a decision will destroy the margins forever, and there is no motivation for the management to do so as their bonuses are going to be unpaid. You can see this from Intel's comments on ARM's business model http://www.eetimes.com/electronics-news/4199302/Intel-CEO-says-the-ARM-way-is-no-way-to-make-money/
Look from another angle,
For ARM the R&D cost of its CPU is shared with its licensees. For Eg, Qualcomm/NVdia/Apple/Samsung all spend R&D $s in advancing ARM architecture and lowering the power.. For Intel to go against this will take a huge $$$ investment over a long period of time to catch up anywhere near where ARM currently is.
Inshort, the way Intel is structured now and its business model, practices has too much inertia to change its model to ARM's way..

"Well, the point is a cheap, very basic device that can handle Facebook, YouTube, and maybe some SaaS aps" ... you mean a 99$ tablet? the one that can have ard 10 hr battery life too..
I doubt whether anyone would want to use an under performing notebook for this purpose

I agree Frank... but Intel could be on to something here. As I commented below, a strategy of outspending your competitions to their demise may work in favor of Intel in the long run.
With that said, there is a huge developing world market where $200 Ultrabook can serve as a computing platform, particularly in the schools. Though the margins may be smaller, Intel can realize some collateral benefits.
MP Divakar

Dylan, it seems me that Intel is trying to 'beat' ARM at this 'low-end' market game. So profit margin (or lack thereof!) may not be the primary motive. Rather, survival while sustaining losses and the opponent eventually extinguishes itself is the primary motive!
MP Divakar

Could a $200 Ultrabook be made? Probably. *Should* one be? Er, *why?*
Folks here may remember the UMPC that Intel and Microsoft cooked up years back, based on Microsoft's Origami research project. Intel and MS both faced the question "Where will growth come from?", as the PC market was largely saturated. Their answer was a whole new platform that would use Intel chips and run a flavor of Windows.
What they didn't provide was a compelling use case, and a reason why folks who probably already *had* a desktop/laptop/notebook would buy one. The folks signed up to make them were people like Samsung and Via Technologies, who weren't seen as players in the laptop/notebook space. Traditional OEMs in that space like Dell, Jujitsu, and Toshiba were notably absent. And the specs seemed carefully designed to make a device that *couldn't* replace a laptop, yet *replacing* a laptop with a smaller, lighter, cheaper device is about the only reason anyone *would* get one.
This strikes me as more of the same. The projected device, if it sold at all, would be cannibalizing the existing laptop/notebook market, competing with bread and butter lines at a cheaper price. The number of *new* sales it would make to people who didn't own one would likely be small, and as mentioned, the specs would mean a poor user experience.
Someone might decide to try to make this. If I were Intel, I might sell them CPUs, but I certainly wouldn't take the lead in driving the creation.

That system with a $200 BOM is not a $600 notebook, it's a $300 notebook. Hardware profit margins are pretty thin, both for manufacturers and for sellers, unless you happen to be Apple.
But it's also not Good Enough, at least not if it's going to run Windows. You really want at least an 11" display at 1366x768 resolution in the notebook form factor (where the screen is farther away than a tablet screen) and 4GB RAM. And you didn't include the cost of a Windows license. At that point you have an ASUS VivoBook X202e (except that it has a Core i3 instead of an Atom), which is currently selling for $400 and is a nice value at that price. Swapping in an Atom would give you less speed and more battery life and probably not change the price a lot; some users might prefer that tradeoff.
I don't think we can get to the $200 price point right now and build a compelling Windows notebook computer; we'd just be back to Netbook Redux. Perhaps in another year or two, as costs continue to come down. Meanwhile I think there are some sales to be made by $400 notebooks.
Alternative platforms like Chromebooks can reach lower price points because their hardware needs are smaller; 2GB and a small SSD are enough. It also helps that Google is willing to sell them at cost.